Week 2 - Absorption Costing Flashcards
What are overheads charged to?
Overheads are normally charged to the cost centres that use them.
How do departments charge overheads?
Departments charge the overheads to the cost units (products) they work on.
What is the process of re-apportioning overheads?
You re-apportion overheads between departments to the production departments.
What methods are used for re-apportioning overheads?
Methods used are: Direct method, Step-down method.
What does the Step-down method do?
Re-apportions service departments costs to both operating and support departments based on mutual services provided.
What does the Direct method do?
Re-apportions to only the main operating/production departments.
What are the methods of cost allocation?
- Direct method (No mutual service) 2. Step-down/Reciprocal services methods 3. Simplified (Elimination) Method 4. Repeated Distribution Method 5. Algebraic (Simultaneous Equations) Method.
What is the difference between allocating, apportioning, and reapportioning costs?
Allocating costs are assigned to specific departments, apportioning charges overheads to all cost centres, and reapportioning service department costs to production departments.
How does the canteen recharge its overheads?
The canteen must recharge its overheads to the production departments on a reasonable basis.
How are maintenance overheads reapportioned?
Maintenance overheads are reapportioned to both production departments based on service hours.
What is the Overhead Absorption Rate (OAR)?
The production departments must charge (absorb) their overheads to the products they work on.
How is the overhead absorption rate calculated?
Overhead absorption rate = budgeted expenditure ÷ budgeted activity.
What information is needed to calculate OAR?
State total overhead costs in each department and total budgeted machine hours and labour hours.
What happens after calculating OAR?
Each department can absorb (charge) the overhead to products based on their absorption rate and actual work done.
What factors influence the choice of absorption basis?
The choice is based on common sense and judgement, reflecting the attributes of a given production centre.
What are the conditions for under-absorption and over-absorption?
Over-absorption occurs when Total overheads absorbed > Total actual overhead; Under-absorption occurs when Total overheads absorbed < Total actual overhead.
What are the two methods of absorption costing?
a) Direct method b) Indirect method.
What is the impact of using different absorption bases?
The choice of basis can make a difference in managerial evaluations and could potentially affect job security.
What is the Step Down Method in absorption costing?
The service cost centre that serves most other service cost centres should be reapportioned first.
What are the advantages of absorption costing?
- Improved managerial awareness of total costs 2. Selling prices can cover full product cost 3. Required for valuing closing inventory 4. Used for budgeting purposes.
What are the problems with absorption costing?
- Arbitrary re-apportionment can lead to incorrect decisions 2. Under/over absorption adjustments must be made 3. Ignores the distinction between fixed and variable costs.
